| Management’s Discussion and Analysis |
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SAND Technology Inc.
Management’s Discussion & Analysis
Quarterly Report
First Quarter Ended October 31, 2009
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This Management’s Discussion and Analysis should be read in conjunction with the attached October 31, 2009 unaudited interim consolidated balance sheet, consolidated statements of operations, comprehensive income and deficit, consolidated statement of cash flows and related notes to the unaudited interim consolidated financial statements. For additional information, readers should refer to SAND Technology Inc’s (SAND) Management’s Discussion and Analysis of SAND’s 2009 Annual Report.
Certain statements contained in this discussion are "forward-looking statements" within the meaning of the United States Securities Act of 1933, of the United States Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995 and following the Quebec Securities Act. The forward-looking statements are intended to be subject to the safe harbour protection provided by these Acts. We have based these forward-looking statements on our current expectations and projections about future results, levels of activity, events, trends or plans.Such forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of SAND to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "guidance," "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions. All forward-looking statements included in this discussion are based on current expectations and on information available to the Corporation on December 16, 2009. For a more detailed discussion of these risks and uncertainties and other business risks, see "Risk factors that may affect future results" below and the Corporation's reports to the Securities and Exchange Commission (filed on EDGAR atwww.sec.gov) and the Canadian securities authorities (filed on SEDAR at www.sedar.com). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required by applicable laws, we undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
All figures given in this discussion are in Canadian dollars unless otherwise noted. SAND reports its unaudited consolidated financial statements in Canadian dollars and in accordance with Canadian generally accepted accounting principles (GAAP).
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Corporate Profile
SAND Technology provides Data Management Software and Best Practices for storing, accessing, and analyzing large amounts of data on-demand while lowering TCO, leveraging existing infrastructure and improving operational performance.
SAND/DNA solutions include CRM analytics, and specialized applications for government, healthcare, financial services, telecommunications, retail, transportation, and other business sectors. SAND/DNA has achieved "Certified for SAP NetWeaver" status and SAND Nearline Integration Controller has achieved "Powered by SAP NetWeaver" status.
SAND Technology has offices in the United States, Canada, the United Kingdom and Central Europe.
Quarterly Performance
The following table shows selected consolidated financial data of SAND for the eight most recently completed quarters. The information has been prepared on the same basis as the annual consolidated financial statements, but is unaudited. These operating results are not necessarily indicative of results for any future period. You should not rely on them to predict our future performance.
| | 2010 | 2009 | 2008 |
| | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 |
| Revenue | | | | | | | | |
| Revenue | $2,485,464 | $1,706,293 | $2,371,632 | $1,747,384 | $1,223,928 | $1,888,042 | $1,905,984 | $1,419,521 |
| Quarter-over-quarter revenue growth (reduction) | 46% | (28%) | 36% | 43% | (35%) | (1%) | 34% | (20%) |
| Cost of sales and product support | $307,120 | $319,612 | $349,592 | $405,632 | $321,388 | $336,960 | $333,900 | $387,191 |
| Gross margin | 88% | 81% | 85% | 77% | 74% | 82% | 82% | 73% |
| | | | | | | | | |
| Total Research and development, amortization of | | | | | | | | |
| capital assets, and selling, general and administrative | | | | | | | | |
| expenses and net interest income or expense | $1,747,054 | $1,761,806 | $1,721,343 | $1,469,167 | $1,892,392 | $ 2,035,210 | $ 1,563,643 | $ 1,523,673 |
| Profitability | | | | | | | | |
| Net earnings (loss) | $431,290 | ($375,127) | $300,697 | ($127,415) | ($989,850) | ($484,128) | $8,441 | ($491,343) |
| Basic earnings (loss) per share | $0.03 | ($0.03) | $0.02 | ($0.01) | ($0.07) | ($0.03) | $0.00 | ($0.03) |
| Quarter-over-quarter increase (decrease) in net | | | | | | | | |
| earnings (loss) | (215%) | (225%) | (336%) | (87%) | 104% | (5835%) | (102%) | 61% |
| Net margin | 17% | (22%) | 13% | (7%) | (81%) | (26%) | 0% | (35%) |
| Weighted average number of shares outstanding | 14,318,189 | 14,318,189 | 14,318,189 | 14,318,189 | 14,318,189 | 14,318,189 | 14,318,189 | 14,318,189 |
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Revenues
The following table provides a summary of the revenue growth for the three-month periods ended October 31, 2009 and 2008,
| Revenue - Total and Variation | Q1-10 | Q1-09 |
| Revenue | | |
| Revenue | $2,485,464 | $1,223,928 |
| Variation year-over-year increase (decrease) in | | |
| revenue | 103% | (31%) |
Compared to the first quarter of fiscal 2009, there was a large increase in our revenues for the first quarter of fiscal 2010. The revenue growth is mostly due to the sale of high value software licenses in Europe to two existing customers.
The Corporation has two geographical segments. Both North American and European segments market SAND/DNA Product Suite. The following table provides a summary of the revenue growth by geographical segments for the three-month periods ended October 31, 2009 and 2008,
| | North America | Europe |
| Revenue - Segment and Variation | Q1-10 | Q1-09 | Q1-10 | Q1-09 |
| Revenue | | | | |
| Revenue | $628,570 | $428,152 | $1,856,894 | $795,776 |
| Variation year-over-year increase (decrease) in | | | | |
| revenue | 47% | (40%) | 133% | (26%) |
In North America, our first quarter sales of fiscal 2010 were 47% higher than in the first quarter of fiscal 2009. The increase is due to higher sales to our distributor, as well as, sales of consulting services to two existing customers.
In Europe, our first quarter sales of fiscal 2010 were 133% higher than in the first quarter of fiscal 2009. The increase is due to the high value sales of software to two existing customers. In the same quarter last year, there were smaller software sales.
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Operating Expenses
The following table provides a summary of the operating expenses for the three-month periods ended October 31, 2009 and 2008,
| | | | As a % of | As a % of |
| | Q1-10 | Q1-09 | Q1-10 | Q1-09 |
| | | | revenue | revenue |
| Cost of sales and product support | 307,120 | 321,386 | 12% | 26% |
| Variation year-over-year increase (decrease) in | | | | |
| cost of sales and product support | (4%) | (22%) | | |
| Research and development, net | 486,785 | 522,058 | 20% | 43% |
| Variation year-over-year increase (decrease) in | | | | |
| research and development | (7%) | (12%) | | |
| Amortization of capital assets and other assets | 14,528 | 17,451 | 1% | 1% |
| Selling, general and administrative expenses | 1,159,324 | 1,265,623 | 47% | 103% |
| Variation year-over-year increase (decrease) in | | | | |
| selling, general and administrative expenses | (8%) | 27% | | |
a) Cost of Sales and Product Support
Cost of sales and product support consists mainly of costs related to providing support services and the costs related to the sale of third-party software, including certain license fees and royalties.
Compared to the first quarter of fiscal 2009, the cost of sales and product support remained stable in the first quarter of fiscal 2010.
b) Research and Development
Research and development expenses consist mainly of salaries and other personnel-related costs of technical and engineering personnel associated with our research and product development activities, including the enhancement and localization of existing products, quality assurance, and testing.
Compared to the first quarter of fiscal 2009, the research and development expenses in the first quarter of fiscal 2010, decreased by 7% due to the quarterly accrual of R&D tax credits for the current quarter.
c) Amortization of Capital Assets
Amortization of capital assets consists of the depreciation of furniture and equipment, computer equipment and leasehold improvements and contract costs over their estimated useful lives. Our amortization was $14,528 in the first quarter of fiscal 2010, compared to $17,451 in the first quarter of fiscal 2009.
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d) Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses include salaries, commissions and other personnel-related costs, the impact of foreign exchange gains and losses, travel expenses, advertising programs and other promotional activities associated with the selling and marketing of our products.
Our SG&A expenses were $1,159,324 in the first quarter of fiscal 2010, a decrease of 8% from SG&A expenses of $1,265,623 in the first quarter of fiscal 2009. The increase in commissions and sales tax payable in the first quarter of fiscal 2010 due to the higher sales was offset by the higher foreign exchange loss recorded in the same quarter last year, overall decrease in external consulting fees and a reduction in marketing expenses.
Net Income
The following table provides a summary of the net loss for the three-month periods ended October 31, 2009 and 2008,
| Net Income (Loss) - Total and Variation | Q1-10 | Q1-09 |
| Net income (loss) | | |
| Net income (loss) | $431,290 | ($989,850) |
| Variation year-over-year increase (decrease) in net | | |
| loss | (144%) | 225% |
Our net income was $431,290 in the first quarter of fiscal 2010, a decrease of 144% from net loss of $989,850 in the first quarter of fiscal 2009. The change from net loss to net income is mostly due to the large increase in sales.
The following table provides a summary of net loss by geographical segments for the three-month periods ended October 31, 2009 and 2008,
| | North America | Europe |
| Net earnings (loss) - Segment and Variation | Q1-10 | Q1-09 | Q1-10 | Q1-09 |
| Profitability | | | | |
| Net earnings (loss) | ($484,132) | ($888,750) | $915,422 | ($101,100) |
| Variation year-over-year increase (decrease) in net | | | | |
| earnings (loss) | (46%) | (17%) | (1005%) | (113%) |
a) North America
In North America, there was a reduction in net loss by 46% in the first quarter of fiscal 2010, compared to the first quarter of fiscal 2009. The reduction is mainly due to the overall increase in sales in North America to existing customers in the form of consulting services and software licenses.
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b) Europe
In Europe, there was a large reduction in net loss in the first quarter of fiscal 2010, compared to the first quarter of fiscal 2009. The reduction is mainly due to the overall increase in sales in Europe to existing customers and the reduction in external consulting costs.
Liquidity and Capital Resources
The Corporation used $211,993 to finance operating activities during the three-month period ended October 31, 2009, including $480,446 in operating income and a decrease of $692,439 in non-cash operating working capital. This result compares with the cash used in the same quarter last year of $328,200 to finance operating activities including $951,136 in operating losses and an increase of $622,936 in non-cash operating working capital. The current decrease in non-cash working capital is mainly due to higher unbilled receivable balance, higher prepaid expenses, higher accounts payable and lower deferred revenue.
Accounts receivable were $1,391,173 as at October 31, 2009 compared to $1,384,199 as at July 31, 2009. The accounts receivable balance remained stable as there was a slight decrease by 1%. Some of the amounts received were offset by the billings for the first quarter of fiscal 2010.
Unbilled receivable was $640,305 as at October 31, 2009 compared to $109,414 as at July 31, 2009. The increase in unbilled receivable represents the sale of software to an existing customer in Europe. The sale of software was an upgrade to the existing software licenses.
Prepaid expenses were $226,749 as at October 31, 2009 compared to $97,689 as at July 31, 2009. The increase of 132% is mainly due to the upfront payment for insurance for the fiscal year 2010.
Accounts payable and accrued liabilities were $1,381,113 as at October 31, 2009 compared to $1,002,902 as at July 31, 2009. The increase of 38% is mainly due to the delay in payment of some invoices, the accrual for the sales taxes payable and commissions on higher sales.
During the three-month period ended October 31, 2009, the President and Chief Executive Officer of the Corporation was paid $550,048 as a reduction of the demand loans payable to him.
At October 31, 2009, there was a working capital ratio of 0.90 compared to a working capital ratio of 0.88 as at July 31, 2009. Working capital ratio has been calculated as current assets to current liabilities, excluding deferred revenue and deferred credits which are non-cash items. The improvement in working capital ratio is mainly due to the increase in unbilled receivable, and reduction in the loan payable to a shareholder.
Capital expenditures for the three-month period ended October 31, 2009 were nil, compared to $17,294 for the same quarter last year.
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Our cash as at October 31, 2009 was $303,531 compared to our cash at the same quarter last year of $560,135. The decrease is mainly due to use of cash to pay the shareholder the demand loans payable to him. Going forward, the cash required to sustain the business operations will have to come from revenue growth and future financing. The cost structure will remain stable as SAND has basically reached its optimal level with respect to headcount and its related expenses. Given the current global financial crisis it will be difficult to raise large amounts of additional funds through private placements or the market except through an increase in loans from major shareholders or smaller private placements. Another impact of the current global financial situation is that customers are reducing their internal budgets to spend in order to conserve the cash and if they do, they will want longer payment terms.
The Corporation believes that its current cash may not be sufficient to meet its anticipated cash needs for ongoing operating expenses and working capital expenditures. If cash generated from operations becomes insufficient to satisfy its liquidity requirements, the Corporation may seek to sell additional equity or debt securities. If additional funds are raised through the issuance of debt securities, holders of these securities could have certain rights, preferences and privileges senior to holders of its common shares and the terms of this debt could restrict the Corporation’s operations. The sale of additional equity or convertible debt securities could result in additional dilution to the Corporation’s existing shareholders. The Corporation cannot be certain that additional financing will be available in amounts or on terms acceptable to it, if at all. If the Corporation is unable to obtain additional financing, it may be required to reduce the scope of its operations, which could harm its business, financial condition and operating results.
Commitments
The following table provides a summary of the contractual commitments for the next six years (there are no contractual commitments after 2015).
| | $ |
| 2010 | 402,360 |
| 2011 | 259,991 |
| 2012 | 75,045 |
| 2013 | 75,045 |
| 2014 | 75,045 |
| 2015 | 25,015 |
| | 912,501 |
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Transactions with Related Parties
There are three types of loans that are due to a major shareholder who was also the President and the Chief Executive Officer until his retirement effective November 1st, 2009.
| | i. | Under the 2009 loan agreement, a maximum of $250,000 of funds is available. The loan bears interest at 15% and it is payable on the last business day of each calendar month. As at October 31, 2009, no amount was outstanding. |
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| | ii. | Under the 2008 loan agreement, maximum of $400,000 of funds is available. The loan bears interest at 15% and it is payable on the last business day of each calendar month. As at October 31, 2009, no amount was outstanding. |
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| | iii. | The 2007 loan originated from amounts owed by the Company to the shareholder by virtue of his employment contracts. As at October 31, 2009, an amount of $1,295,039 was outstanding and repayable within 90 days of the receipt of a written demand from the shareholder. The loan bears interest at 15% and it is payable on the last business day of each calendar month. As well, as part of his employment contract, he is entitled to a bonus based on the gross revenues resulting from the licensing, sale or other disposition of Nucleus software. As at October 31, 2009, an amount of $171,638 was outstanding. |
Subsequent to October 31, 2009, effective November 1, 2009, Arthur G. Ritchie, President and Chief Executive Officer retired and Thomas M. O’Donnell was announced as the new President and Chief Executive Officer of the Corporation. He continues to be the Chairman of the board of directors. As a result of his retirement, his loan agreements have been ratified such that the amounts owing to him will be repaid in equal instalments over 3 years. The loan will continue to bear interest at 15% per annum and will be paid on a semi-annual basis. As well, an amendment was made to the inter-creditor priority agreement, whereby the parties agreed that the sums owing under the debentures will be paid by the Corporation to debenture holders and the trusteepari passuto the sums owing by the Corporation to the principal shareholder. So for every $1 paid to the debenture holders, the Corporation shall remit $1 to the principal shareholder.
Outstanding Share Data
As at October 31, 2009 there have been no significant changes to the Corporation’s outstanding shares since July 31, 2009. Please refer to the 2009 Annual Report for more details.
Subsequent to October 31, 2009, in November 2009, the Corporation completed a non-brokered private placement where the Corporation issued 785,715 units for US$0.70 per unit, for total proceeds of US$550,000 to investors, one of whom effective November 1, 2009, is the President and Chief Executive Officer. Each unit consists of two Class “A” common share and one share purchase warrant, exercisable at a price of US$0.50 per warrant.
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Critical Accounting Policies
The Corporation’s significant accounting policies are described in Note 3 to the July 31, 2009 audited consolidated financial statements.
These interim consolidated financial statements have been prepared using the same accounting policies and methods of their application as the annual consolidated financial statements for the year ended July 31, 2009, except for new accounting policies that have been adopted effective August 1, 2009.
Changes in Accounting Policies
The Canadian Institute of Chartered Accountants (“CICA”) issued the following new Handbook Section, which are effective for the Corporation for interim periods beginning on or after August 1, 2009,
Financial instruments – disclosures (amendment)
In June 2009, the AcSB amended CICA Section 3862, “Financial Instruments – Disclosure” to include certain requirements related to financial instrument disclosure in response to amendments issued by the International Accounting Standards Board. The amendments are consistent with its strategy to adopt IFRS and to ensure the existing disclosure requirements for financial instruments are converged to IFRS to the extent possible. The new disclosure standards require disclosure of fair values based on a fair value hierarchy as well as enhanced discussion and quantitative disclosure related to liquidity risk. The amended disclosure requirements are effective for annual financial statements relating to fiscal years ending after September 30, 2009.
The additional disclosures required as a result of the adoption of these standards, have been included in Note 13 Financial Risk Management Objectives and Policies, and Financial Risks.
Business Risks and Critical Accounting Estimates
These remain unchanged from the factors detailed in SAND’s 2009 Annual Report.
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board (AcSB) announced that Canadian GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards (IFRS) for interim and annual financial statements for fiscal years beginning on or after January 1, 2011, with comparatives for the prior year. The Corporation will be required to report financial statements prepared in accordance with IFRS for the fiscal year ending July 31, 2012 with comparatives for fiscal year ending July 31, 2011. The Corporation continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS.
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Outlook
SAND is committed to focusing its resources on the development and enhancement of its SAND products in order to respond to current changing technology and customer needs. SAND is also committed to focusing its attention on growing sales through direct sales, partnerships with key systems integrators and application vendors and alliances with proven indirect channels. The focus will be on delivering “nearline” software solutions and best practices.
Looking forward we see that the environment is more challenging than we previously anticipated and customers have adopted a more cautious attitude to place orders due to the uncertainty related to the current global economic situation. While we are concerned about uncertainties in the macro-economic environment, we believe that the value of SAND products as an enabling technology that increases efficiency and saves costs will remain intact over the long-term. These strengths may prove to be real opportunities in a time when budgets are being cut.
Controls and Procedures
No changes have been made to our internal controls over financial reporting during the quarter ended October 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
